The Education Calculation ProblemEconomic Calculation and Government Schools

The education system in the United States is failing us, accordingto themedia.1 Various reform proposals are floated to fix this problem. It’s a cultural issue, or we need vouchers, or we need to look to foreign systems. Or maybe we need more funding, smaller classrooms, reforms for teacher compensation or tenure rules, and so forth. Yet all of these proposals will fail to fix the problem, because the fundamental issue is not understood. That fundamental problem is the lack of economic calculation.

Briefly, what exactly is economic calculation and why is it needed for the provision of education? Economic calculation is the process by which a market determines what is the most cost-effective and productive use of resources. The concept was first outlined by the economist Ludwig von Mises in his 1920 article “Economic Calculation in the Socialist Commonwealth”2, and expounded upon by his protégés F.A. Hayek and Murray Rothbard in later works. As Murray Rothbard explained the concept3, Mises went beyond the incentive problem of socialism (wherein if one is compensated “according to their needs”, what incentive do they have to produce “according to their ability”?) to

suppose that the socialists have been able to create a mighty army of citizens all eager to do the bidding of their masters, the socialist planners. What exactly would those planners tell this army to do? How would they know what products to order their eager slaves to produce, at what stage of production, how much of the product at each stage, what techniques or raw materials to use in that production and how much of each, and where specifically to locate all this production? How would they know their costs, or what process of production is or is not efficient?

In this vein, it becomes clear that despite any good intentions of the teachers, administrators, and bureaucrats that make up a public school system, the success of such an operation is (unlike a market system) essentially based on luck. Should we spend our money on textbooks or more teachers? Which textbooks are best? Should we build a new school, or expand the facilities we have? Spend more on arts or technology classes? Chalkboards or whiteboards? Replacing equipment for the physics labs or uniforms for the football team? Increase teacher salary, or hire more teachers for smaller class sizes? Buy cheap, low-quality desks, or spend a bit more on higher-quality desks? All of these potential options (and more!) depend on the conflicting use of scarce resources, and all have different pros and cons relating to the educational success of students. But the monopolized public school system, where students are forced to attend and money is obtained via taxation (instead of tuition payments), has no way to ferret out the best configurations in this regard. It is a private, market system that can do this. If one obtains revenue by selling educational services, the incentive is to provide the best possible education for the money one can, so as to get the most students.

But it is the competition, not the incentive, that provides the ability to solve this economic calculation problem. It is the fact that many groups (not simply one) are trying different methods to reach that goal, and the ones that do the best will succeed more than the others. As a result, the market naturally configures and reconfigures the educational system to meet the needs of its students in ever better ways, despite the fact that those needs are always changing based on what is needed to be learned to become successful. Nor can this form of competition be replicated in the state school system. As the source of funding is not the consumer purchasing education, even a competition for funding initiated by a bureaucratic program would not solve this problem. The bureaucrat, then, is deciding what is most “successful”, rather than people noting previous levels of success out of graduates and current students. As a result, the bureaucrat becomes the focal point for the calculation problem. Instead of dispersed information and desires congregating through the decisions of millions, just a few individuals are deciding what is best.

As such, a public school system is guaranteed to fail, relative to the potential success of the market, and will become worse as time goes on. The only way to reliably provide a robust and useful education to individuals is through the free market. And the objection that this will not help the poor is just as false – competition, in this process, will provide more of a service until demand is met, from both the rich and the poor, just as it has steadily decreased the price (in work hours, as inflation keeps increasing the price as well) for other necessities like food and shelter. The wasteful nature of a system devoid of economic calculation only makes it impossible for the poor to actually afford quality services.

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